Hedge funds, this months, get to advertise for first time

Tim Loh

Published 9:22 pm, Friday, September 6, 2013

On Sept. 23, for the first time in 80 years, the light will turn green for some of southwestern Connecticut's most profitable -- and, some would argue secretive -- firms to advertise their services.

But don't expect to be flooded with TV commercials and print promotions telling you to invest your hard-earned cash in hedge funds or private-equity firms.

For one thing, the old restrictions about how wealthy a household must be to invest in a hedge fund stays in place (to wit: a net worth of at least $1 million, excluding a primary residence, or an annual income of more than $200,000, or $300,000 with a spouse).

For another thing, there is enough uncertainty still about the regulations to inspire caution -- to say nothing about how advertising in the Wall Street Journal might be interpreted by potential investors.

Even so, there are signs that the world of complex money managing in southwest Connecticut may soon get spiced up.

"I think it's potentially a very big deal; I think there's a fair amount of excitement in the hedge fund industry," said Bruce McGuire, president of the Connecticut Hedge Fund Association. "But a lot of firms are still taking a wait-and-see approach. My sense is, no one wants to be first."

A year in coming

The process of lifting of the ban, which has been in place since 1933, kicked into high gear in April 2012, when President Barack Obama signed the Jumpstart Our Business Startups Act into law.

(That also made it easier for small start-ups to raise capital without having to comply immediately with Securities and Exchange Commission reporting rules).

This July, the SEC, in a 4-1 vote, approved the crux of a new set of rules that will lift the ban as of Sept. 23. Opponents of the change fear it will increase the exposure of unsuspecting investors to potentially fraudulent schemes.

But backers say the move is a long time coming.

"This is really about the hedge fund industry joining the 21st century," said Mitch Ackles, president of the Hedge Fund Association, a lobbying and trade group.

Out of the shadows

One reason hedge funds are so often viewed with skepticism, Ackles argues, is that current regulations about who they are allowed to share information with -- only high net-worth investors -- are so stringent.

By easing that burden, he said, hedge funds will get to come out of the shadows a bit. However, they will be required now to ascertain that potential investors actually meet the wealth requirements.

For instance, they will get to experiment more with social media or put more information about their firm online at the public's fingertips -- rather than hiding it all behind password-protected walls, which is now the norm -- without the fear of being accused of improper advertising.

"If we walk by a window at Tiffany's, and the window is blacked out, even if I can't afford to buy those jewels, why shouldn't I be allowed to look in?" Ackles reasoned. "Once that sunlight is in, it will raise understanding from Main Street's perspective as to what a hedge fund is and enable those funds to be able to talk more about what they do."

He added: "People want to know, `How well is your fund doing?' But I can't tell you now because I haven't had you fill out a form to get you approved."

Interest in Connecticut

McGuire thinks this will probably benefit relatively smaller and newer hedge funds more than the larger and established ones.

That's because newer funds face steeper uphill climbs in attracting investors. Meanwhile, a firm like Bridgewater Associates in Westport, which manages $145 billion already, may not even have room for further growth.

Moreover, hedge funds often wear as a badge of honor that they don't spend time worrying about marketing, rather they let their funds' performance speak for itself.

"But if we do start advertising," he said, "then we might seem less sophisticated or more desperate."

Since July, McGuire has seen frequent email blasts sent by attorneys who specialize in the compliance laws for finance firms who are setting up conference calls, Webinars and symposiums about the topic.

Greg Kahn, an attorney at Day Pitney in Stamford, has also experienced that heightened interest. He said he's received a flurry of questions from interested fund managers in recent months.

Kahn is urging caution for now, because there are more SEC regulations that will come down in coming months. Until the whole picture is clear, he said, it may be best to be cautious.

"Our general advice is wait and see," he said.

Ahead of the curve

Of course, some are always willing to get out ahead of the pack.

Last year, a Chicago hedge fund called Capitalistpig Asset Management became the first such firm since 1933 to advertise -- well ahead of the government's shifting policies.

In a full-page ad in Crain's Chicago Business, the firm pictured a trio of young adults perched on the edge of a Chicago skyscraper, gazing off into the night sky.

"Ask yourself whether the dream of heaven and greatness should be waiting for us in our graves," reads an accompanying quote by Ayn Rand, "or whether it should be ours here and now on this earth."